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Despite selling more than 780 billion cigarettes last year, the boss of the world’s largest tobacco company insists that he wants people to give up smoking.

Big Tobacco veteran André Calantzopoulos has poured billions into building what he calls a “smoke-free” future at Philip Morris. To get there, the iconic Marlboro brand maker wants customers to switch to alternatives such as vaping.

Yet a key pillar of that strategy – a $200bn merger with Altria – is buckling under the weight of Washington’s latest crackdown on vaping, the public perception of which has been rocked by fierce lobbying, criminal investigations and an epidemic of nicotine-addicted teens.

At first glance, a combination of the two companies would create a tobacco powerhouse with a market value towering over its nearest rival, British American Tobacco. It would give the merged entity an unrivalled roster of new products, making it far less dependent on the highly profitable but shrinking business of selling traditional cigarettes.

The companies described the proposal as an “all-stock merger of equals”, but warned that a deal was not guaranteed.

Both Altria and Philip Morris would benefit from significant economies of scale, leaving them better equipped to deal with the evolving consumer landscape and rising levels of regulatory scrutiny, according to Moody’s tobacco analyst Roberto Pozzi.

In recent weeks, however, a cornerstone of that deal – Altria’s stake in controversial vaping company Juul – has been thrust into an unforgiving spotlight after US officials sounded the alarm over flavoured e-cigarettes. Reports this week suggested that Juul is also being probed by federal prosecutors in California, although details of the investigation remain unknown.

It follows an outbreak of mysterious lung diseases and at least eight deaths in America with possible links to vaping. The illnesses have not been traced to any single device or brand.

Juul, which was valued at $38bn in the deal with Altria in December 2018, is responsible for around 70pc of the US vaping market. It has been criticised alongside its competitors for getting young people hooked on e-cigarettes, however – a claim the industry has denied.

The vaping craze among middle school and high school students who would otherwise not smoke is, in part, blamed on flavours such as ‘gummy bear’ and ‘scooby snacks’. With sleek devices resembling flash drives, critics also point to young people sneaking e-cigarettes into school bathrooms or posing with them on social media.

Health officials estimate that e-cigarette use last year surged to just over a fifth of high schoolers in America, nearly double from 12pc the previous year. This is in stark contrast to just 1.6pc of young people in Britain, where vaping is still widely regarded as a safer alternative to smoking. Some experts put this down to lower amounts of nicotine in e-cigarettes under European regulation.

Juul is reportedly being probed by federal prosecutors in CaliforniaCredit:
MIKE SEGAR/Reuters

So far the industry has placed the blame for the recent health scares squarely on “non-reputable” companies. But with public backlash coming to a head, the chances of Philip Morris shareholders warming to the merger with Altria appear less certain.

“We think that the merger is less likely to happen,” says Garrett Nelson, analyst at research firm CFRA. “The major hang-up that we see is regulation. Philip Morris shareholders are going to require a lot of convincing that the company should re-enter the US market at a time of heightened regulatory uncertainty.”

“You’ve only got to look at the share price reaction to see that investors are nervous. A lot of what has happened has panicked the market,” says Jonathan Fell of investment manager Ash Park, which owns shares in several tobacco companies including Philip Morris and Altria. While a combination of the two would give Juul a more global platform, Fell admits that a decision to “ditch Juul” would not surprise him.

The industry watchdog has also taken issue with Juul’s advertising. The Food and Drug Administration recently accused the business of illegally marketing its vaping products as being safer than cigarettes. The FDA threatened even more aggressive action if the rise in youth vaping continued.

“Part of the appeal of vaping to these tobacco giants has been the greater freedom they have to market those products compared to the tight restrictions around marketing their traditional tobacco products,” OC&C UK managing partner Will Hayllar says. “Any proposed legislation to increase restrictions on vaping will make that harder.”

The crackdown has dimmed the outlook for Juul, once a promising Bay Area startup, which surged ahead of competitors and was swiftly branded the ‘iPhone of vaporisers’ following its launch in 2015. When Altria bought a 35pc stake in the company for $12.8bn in 2018, it turned the co-founders – James Monsees and Adam Bowen – into billionaires overnight.

For years, the company's products and those of its rivals have been sold in store and online in America without FDA approval. That will come to an end in May next year, when vaping companies will be required to submit applications for market approval. But with some pushing regulators to consider a recall of e-cigarettes, industry observers say that Juul’s path to approval involves more risk.

Unlike Juul, Philip Morris has already received FDA approval for its IQOS product, which heats – but does not burn or vaporise – tobacco. The company estimates that 8 million smokers have already made the switch to IQOS devices. Available in more than 47 countries, the product will be marketed and sold in the US through a licensing agreement with Altria.

Erik Bloomquist, an independent consultant and former industry analyst, believes that Juul may be a victim of its own success. The business has been “unfairly” forced to bear the brunt of the rise in teenage vaping, he says. But with public outrage against vaping in the US reaching “fever pitch”, he concedes that regulatory action would hit the size of Juul’s market, making any deal “much more questionable” for Philip Morris shareholders.

Vaping is now banned in India, the world's second-largest consumer of tobacco products after China. Juul has also seen its e-cigarettes and nicotine pods mysteriously pulled from China just days after its launch in the country. Together, the two countries make up more than half of the world’s smokers.

The headache for Juul and the rest of the vaping industry is unlikely to end there.

Bloomquist adds that further regulatory action in the US could “embolden” the World Health Organisation to push for similar restrictions globally.

“The WHO is very influential in most of the developing world,” he says. “That would carry a tremendous amount of weight, creating knock-on effects far beyond the US border.”